AN EMPIRICAL ANALYSIS OF THE EFFECT OF CONSUMER PROTECTION REGULATIONS ON MICROFINANCE INSTITUTIONS IN LATIN AMERICA AND THE CARIBBEAN

Abstract

This paper analyzes the effects of prudential regulation, interest rate caps and transparency requirements on microfinance institutions in Latin America and the Caribbean. The analysis focuses on the way in which these consumer protection policies affect operational self-sufficiency and outreach to women and poor borrowers. This approach differs from the existing literature in that it examines the effects of specific laws, rather than broad categories of regulation, and builds on previous studies by using panel data, taking advantage of an additional decade of data that is now available. Using data from MIX Market on 550 microfinance institutions from 20 countries across the years 2004 to 2014, this study finds that while operational self-sufficiency and interest rate caps are associated with reduced outreach at the institutional level, transparency requirements improve outreach by expanding an MFI’s number of borrowers and reducing the average loan size. These results are particularly relevant given the current discussion in the media regarding the need for consumer protection in the sector and the recent and forthcoming regulatory changes in this area.